Yanukovich kicks off his ‘big lender’ tour: First stop China, next Russia

President Viktor Yanukovych left the chaotic streets of Kiev for planned trips to China and Russia, in search of a fix for Ukraine’s near bankrupt economy, which has left him walking a narrow line between European and Russian trade deals.

Political instability could push Ukraine’s economy to the brink
of default. As thousands of protestors fill the capital
Yanukovych said the trip is very “important” as he is
looking east to patch up Ukraine’s financial mess.

“Although our domestic situation isn’t appropriate for the
visits, if I, relatively speaking, cancel these visits, the
state’s economy will suffer,” Yanukovych said on Ukrainian
television Monday evening.

Concerns over protests in Kiev sent the cost of insuring against
a debt default soaring higher on Tuesday, the Financial Times
reports. The yield on the government’s benchmark bond maturing in
September 2020 rose to 10.87 percent, with the yield on its bond
maturing in June 2014 going up more than 16 percent from Monday’s
close, according to Bloomberg.

During the three-day visit, Ukraine will sign a number of
economic cooperation agreements, including possible investment
deals.

Yanukovych may be chasing a “Chinese solution” to temporarily
prevent an economic rupture at home. The government faces $15.3
billion in maturing loans that will further deplete the Central
Bank's currency reserves. As of October 31, Ukraine’s
international reserves dropped to $20.6 billion, according to
Bloomberg data. The Central Bank intervening to repay debts will
threaten the financial stability and the value of the grivnya,
Ukraine’s currency.

"We continue to believe that large-scale financial assistance
from either Russia or China is not likely to be forthcoming and
that a key short-term risk stems from a possible acceleration in
capital outflows," Goldman Sachs wrote in a December 3 note.

Ukraine’s Finance Minister Yuri Kolobov reassured investors that
the country is a “reliable borrower” with a “flawless
record of meeting all its obligations on time” he said on
Ukrainian state television Tuesday, urging everyone to “remain
confident” in the banking system.

Ukraine’s first Deputy Prime Minister Sergey Arbuzov, who took an
official trip to China last September, confirmed Ukraine is
interested in attracting new investment from China.

In September, the South China Morning Post reported China’s Xinjiang Production and
Construction Corporation (XPCC) plans to lease 5 percent of
Ukraine’s total landmass to grow crops and farm pigs on a 50-year
lease.

Food demand in China is expected to grow along with
industrialization, and China has been land-grabbing across the
globe, with 7.4 million acres (3 million hectares) in Ukraine
being the most recent. The news caught ministers in Kiev by
surprise, who knew nothing of the deal. Ukraine lifted a ban on foreigners
buying land last year.

Next stop: Russia

The next destination for President Viktor Yanukovych will be the
country’s closest ally, Russia, where the countries hope to
normalize “the roadmap of cooperation, which will imply normal
trade and economic regime," Prime Minister Nikolay Azarov
said.

Russia is Ukraine’s main source of energy, loans and trade, with Russia
importing nearly 25 percent of Ukraine’s export goods.

On Tuesday Gazprom, who has been demanding Ukraine hand over more
than $1 billion in late gas payments immediately, has extended
the deadline for Ukraine's state-run Naftogaz until spring,
Interfax reported Naftogaz chief Yevhen Bakulin as saying.

"We have agreed to shift our payments for October, November
and December to next spring," Bakulin said.

Although Russia has repeatedly warned Kiev it will end trade
benefits in case it signs a trade association deal with the EU,
Ukraine remains caught between Russia and the EU. Ukraine will send
delegations to both the EU and Moscow “to restore trade
economic relations,” Azarov said Tuesday.

No guarantees

If Yanukovych loses power to the opposition at home, the deal
from Russia could be off the table, according to a December 2
note from Goldman Sachs.

“We think that Russia is unlikely to extend substantial help
without guarantees. Given that it appears that President
Yanukovych's chances of holding on to power beyond the 2015
spring election have decreased following the protests and schisms
in his administration might even weaken his powers earlier,”
the note said.

Alexander Razuvaev, Research Director at Alpari Forex Group, is
confident Ukraine will get the money from either the EU, the IMF
or Russia, and won’t default or turn to China.

“It is clear that Ukraine cannot pay off its debts on its own,
and the probability of a sovereign default is relatively high.
However, in my opinion, in any scenario, it will not default. It
will either receive aid from the EU, IMF, or Russia,”
Business FM online reports.

No deal in Kiev

Prime Minister Azarov remained in Kiev where his ruling party
survived a vote of no confidence by opposition parliament members
following the biggest street protests since the Orange Revolution
in 2004. Only 186 MPs voted for the motion, well short of the
simple majority of 226 needed for it to pass. Thousands of
activists and police clashed outside.

“Afterwards the president will visit Russia, where we also
plan to sign and formalize ‘the road map of cooperation,’ which
will imply the establishment of a normal trade and economic
regime," Azarov said.

At the emergency vote in Kiev, Azarov said he plans to send a
delegation to Brussels next week to work on further EU trade
negotiations and economic aid conditions for Ukraine to sign an
Association Agreement with the EU.